Johannesburg - The decision taken by the German car giant BMW not to produce its new model in South Africa could be a precursor for other companies to do the same as insufficient power supply, rising production costs and labour instability were becoming a deterrent to investing, economists warned on Tuesday.
Speaking at a presentation about the changing global growth dynamics and the implications for South Africa, Nedbank senior economist Nicky Weimar said the domestic woes, especially the constrained power supply, were the biggest drag on the country’s economic growth, more than the impact of globally influenced commodity prices, exchange rates and export demand.
“Stop worrying about the world economy. We need to address these things… Just finishing a power station will make an enormous difference in South Africa, companies will then start to invest,” she said.
Weimar said the power constraints had held the entire economy hostage and that without finishing Eskom’s coal-fired Medupi power station, South Africa was expected to grow at a rate of 3 percent by 2015 when almost all economies, even the euro zone, would have recovered notably, growing at the same rate before the global financial crisis of 2008.
The 3 percent growth rate would be achieved even if circumstances elsewhere in the world were good.
“We have to finish a power station before we can grow at a faster pace… companies can still bear the labour strikes but the lack of power capacity and costs are unbearable. We’ve reached a tipping point,” she said.
Mike Schussler, the chief economist at Economists.co.za, said there had been a number of other companies that had considered investments in South Africa before the power shortages in 2008 and before the labour unrest became so rife in the country.
“It’s just not announced to the rest of the country all the time. Infrastructure challenges, electricity, water shortages, logistics costs all contribute to that. Labour issues stop new investments, not people who are here,” Schussler said.
He pointed out that while labour issues caused BMW South Africa to lose the bid to produce a new car model, electricity constraints had deferred the planned building of an aluminium plant in Coega, near Port Elizabeth.
According to the UN Conference on Trade and Development (Unctad) 2011/12 report, foreign direct investment flows into South Africa decreased by 24 percent to $4.6 billion in 2012 from $6bn in 2011. The UN agency said foreign direct investment flows to the country had been fluctuating a lot in recent years.
Azar Jammine, the chief economist at Econometrix, said businesses were reluctant to invest further in South Africa as they feared the possibility of halting production at the most inconvenient times due to power shortages.
But he said labour issues, such as wage increases and unrest, had an equal effect.
“Both the power and labour issues restrict levels of fixed investments. They both deter investment but the other important factor is the economic policy uncertainty. Even the National Development Plan which seeks to address these, is [experiencing] opposition to its implementation,” he said.
Weimar pointed out that the infrastructure issues, labour concerns, red tape and corruption were all issues that the International Monetary Fund, which classified South Africa as a vulnerable economy, spoke about in its latest report.
With the dependency on foreign capital, as 58 percent of government debt is financed by foreign institutions, she said the rand could depreciate to the weakest levels ever seen when “the big money” left if more companies disinvested from South Africa.
“Just from this initial portfolio adjustment, ahead of the Fed’s tapering [in the US], the rand is vastly undervalued on purchasing power parity by 14 percent,” she said.
Normally at this level what was expected was that it would recover but Weimar said in the current domestic climate, the rand was more likely to continue depreciating.
“A depreciating rand is inflationary. Then clearly the Reserve Bank will have to act, they will have to up interest rates,” Weimar argued.
Business Report